Today in Tech: Utilization rates, Infosys - Palmer case, Cemex deal

I have been with Forbes India since August 2008. I like writing about ideas, events and people at the intersection of business, society and technology. Prior, I was with Economic Times. I am based in Bangalore. Email: ns.ramnath@gmail.com

“Employees on the bench have increased by an average of 50% among top-tier IT firms, posing a serious challenge for software services players”, says Financial Express. Bench refers to people who are on the rolls of IT companies, but are not billed. Every quarter, IT companies release data on the utilization rates. Customers track it because it gives a sense of how fast a project can ramp up. (Lower the utilization rate, the easier it is to find people for a project from internal resources). Analysts track it, because it’s an indicator of how fast a company expects its growth to be, and it also gives an idea of the room it has to manoeuvre its margins.

Sometime back, I spoke to an executive from a top IT firm, and he told me there are three things to remember when we think about utilization rates.

The first is that the rate keeps changing, even if you don’t account for the trainees. Here’s a chart that shows how Infosys’s utilization rates moved up and down in the last five years each quarter (excluding trainees).

Second, a high bench rate does not necessarily mean no one there does any work. For example, a company might deploy 100 people for a project, but will bill only for, say, 98. The other two give a cushion. Sometimes, ahead of an imminent ramp up, a company might deploy more people in a project so that the software engineers get familiar with the work and can hit the road running when their time comes.

Third, companies use utilization rates as a lever to fine tune their costs and maintain margins. In 2007, Indian currency was strengthening against the dollar (opposite of the situation today), and this was putting pressure on the margins. One of the first levers they operated was utilization rate. The growing demand for IT services then allowed them to.

Today, however, there is little momentum left in demand, and IT Services companies will have to look at other levers such as pay hikes and hiring. Which is exactly what they many of them are doing.

A chance for Infosys to settle Palmer case out of court

Economic Times and Business Line havereported that a US federal judge has asked Infosys and Jack Palmer, who accused Infosys of a visa fraud, to settle their dispute at a conference later this month. It’s a part of normal judicial process, and it’s probably good for both parties to settle it this way. But, given the political atmosphere in the US – marked by sentiment against companies that ‘ship jobs out of US' – we shouldn’t be surprised if both parties push their positions a little too hard and end up in the court hearing scheduled next month. Besides the money involved, for Palmer it’s an opportunity to get into Whistle blower’s Hall of Fame and for Infosys it’s a need to prove they were indeed ‘driven by values’.

Cemex deal

Business Standard reports that top Indian IT companies are vying for a contract worth $1-1.2 billion from the Mexico-based Cemex. It's a 7 year deal. Large deals are usually more complex, and therefore more interesting than pure services deals. We saw one such deal a few weeks back. And this promises to be an unconventional one as well.